MAKING NEWS

Wed, 11 June 2008
Fixed home loans fall out of favour
BORROWERS are shying away from fixed-rate home loans, a sign of growing belief that the economy is slowing enough to ward off interest rate rises.

But traders in financial markets are punting on the opposite. Yesterday, they lifted their bets that the Reserve Bank will raise rates more than once by the end of the year.

The percentage of new borrowers signing up for fixed-rate home loans has grown steadily since mid-2005.

By March, almost one in four borrowers chose to lock in their home loan rate to avoid being caught out by more increases.

But the demand for fixing loans waned in April, and fixed-rate loans dropped back to 17.5 per cent of the total market.

A Deutsche Bank economist, Phil O'Donaghoe, said the fall could suggest borrowers were becoming more pessimistic about the state of the economy - and therefore confident that inflation and rates could fall.

Financial markets, however, are taking a different tack. After a wild day of bond trading, investors who bet on rate movements are now factoring in about 0.4 percentage points of rate rises by the end of the year. Before yesterday, only 0.25 percentage points - or one typical Reserve Bank rate rise - were reckoned on.

"It was pretty savage," a senior economist at nabCapital, David de Garis, said of the day's trading.

Comments from the US Federal Reserve chairman, Ben Bernanke, triggered massive market swings. Dr Bernanke warned about the need for central banks to lift rates to combat inflation expectations.

The market gyrations came amid more evidence of a dramatic fall in confidence among prospective home buyers.

Housing finance figures released by the Bureau of Statistics showed the value of new housing loans dropped 3 per cent in April - the third month in a row of solid falls.

"Recent rate hikes have clearly spooked home buyers," a CommSec economist, Savanth Sebastian, said.

Loans for owner-occupied housing slumped by 4.9 per cent in the month, while loans for investment purposes increased by 1.4 per cent.

"The housing market is in the midst of a serious decline," said Joshua Williamson, a senior strategist at TD Securities.

"This is despite strong migration and population growth rates that add to the underlying demand for new housing."

There are also signs the jobs market is starting to weaken. Employment has been a pillar of strength for the economy as the housing and retail sectors groan under the weight of higher interest rates.

But the total number of jobs advertised in major newspapers and on the internet fell by 1.7 per cent in May, which was the third decline this year in the series compiled by the ANZ.

Official jobs figures to be released tomorrow will give a clearer picture of whether employment has started to weaken alongside the broader economy.

The building and construction industry said it was likely the housing market would continue to weaken.

"For the residential building market, a recent spike in petrol prices, on top of higher interest rates, runs the risk of worsening consumer confidence and affecting home buyer behaviour over the remainder of the year," the chief economist at Master Builders Australia, Peter Jones, said.

SOURCE: Jacob Saulwick - Sydney Morning Herald

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